Getty Images We’re taught when we’re young to be leery of peer pressure. As we grow older, we like to think we’ve outgrown its effects. But that isn’t always the case — especially when it comes to our finances.
Some companies are hoping to exploit this fact after determining that a person’s social connections can reveal a lot about how they handle money, according to a recent CNNMoney article.
Armed with this revelation, a slew of start-ups — like Lenddo, Kabbage, and Kreditech — are using a person’s social connections — his Facebook (FB) friends, for example — to determine his creditworthiness.
If this new mode of measurement takes off, you’ll have a lot more to worry about than what’s being reported on your credit history.
Time to Delete That Friend Who’s Always Behind On His Bills?
Although it’s unlikely this data will replace the system banks currently use to decide how much they’ll loan you and at what rate (after all, it’d be a relatively easy system to game by simply unfriending those of your associates who are horrible at budgeting), it should make you think twice about your financial influences.
The idea that your peers influence your beliefs about reality isn’t all that new. In 1935, Turkish social psychologist Muzafer Sherif designed an experiment in which he shone a dot of light on a wall in a dark room and asked participants how far it moved.
The light never actually moved, but due to a trick of the eye, it appeared to. The participants took the test multiple times, and repeatedly gave answers that remained fairly consistent for each individual.
Then Sherif put his test subjects into groups of people who had given a different measurement for how much the light moved. In that scenario, each participant changed his original answer to match whatever the consensus was among the group. Even when asked later on, away from the group, how much the light moved, the individual stuck to the group consensus, abandoning his original answer.
Sherif’s experiment proved that social proof (the academic term for peer pressure) is a powerful force that can change our beliefs and our behaviors, no matter how convinced we are that we’re correct.
The Joneses Are Clouding Your Judgment
Believe it or not, experts have determined that social pressure is an even more powerful force than money.
A 2010 article in The Wall Street Journal lists multiple real-life examples in which a statement like “77 percent of your neighbors already do this” is more successful in getting someone to change their behavior than stating, “You could save $54 on your next bill by doing this.”
This sentiment plays out in many of our everyday purchases — from the car we drive to the house we buy to even the food we eat and the clothes we wear.
“Keeping up with the Joneses” can cause us to splurge more often than we should — often to the detriment of our finances.
So What’s a Person to Do?
I’m not advising you stop associating with all your friends who are big spenders. But at the very least, you should take an honest look at who you spend most of your time with — and whether their financial goals and behaviors align with yours, and what you want yours to be.
Friends who consistently lure you into shopping trips or nights out on the town may be fun to hang out with. But they might also cause you to stray from your budget. Friends who regularly show off their latest big purchase, or invite you over for dinner in their new, larger home might subconsciously convince you to make an even bigger purchase. And yet beneath it all, these friends probably have little savings to show for their lavish lifestyle.
So choose your friends wisely. And be honest to those less frugal than you about your budget and the importance you give to saving. After all, it might be better to see a friendship or two fade now than to spend your retirement years regretting the peer pressure that depleted your savings.
Motley Fool contributing writer Adam Wiederman has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. Try any of our newsletter services free for 30 days.